Roth IRA Excess Contribution Help

[psibley]

I made an excess Roth IRA contribution in 2022 due to lack of earned income. My contribution was of $2000, but I only had $1600 in earned income, so an excess of $400. I know my options are to apply the excess to next year, or remove the excess contribution after the tax deadline - for ease, I believe I would like to apply the excess to next years return; especially since I already filed and paid the 6% penalty for this 2022 Tax Filing year. My main question is what "apply the excess to next year" actually entails? I understand I can leave the excess contribution (of $400) in the Roth IRA and apply it to next year's contribution, but does that mean the $400 excess that I have contributed doesn't officially count for the 2022 year and would actually be going toward the 2023 year? So, for example, if I contributed $2000 for the 2023 year, would I actually write down $2400 contributed on my Tax filing? I'm just confused where this excess of $400 actually comes into play and how to move forward without facing another penalty for 2023. Appreciate the help, thank you all!

[DanaB27 · Accepted solution]

Applying the 2022 excess contribution to next year means you leave it in the Roth IRA (don't involve your financial institute), pay the penalty for 2022, and then apply it to 2023 with an entry on your 2023 tax return. 

Yes, if you contributed $2,000 for 2023 you would enter the $2,000 Roth contribution and then apply the $400 excess in the follow-up questions. Therefore, you used $2, 400 of the general $6,500 contribution limit for 2023. Please make sure you have enough taxable compensation in 2023 to make the $2,400 contribution for 2023.

Please see the steps below for your 2023 tax return.

1. Click on "Search" on the top right and type “IRA contributions”
2. Click on “Jump to IRA contributions"
3. Select “Roth IRA” and enter your $2,000 contribution
4. On the "Do you have any Excess Roth Contributions" answer "Yes"
5. On the "Enter Excess Contributions" screen enter the total excess contribution from 2022 of $400 (if it wasn't carried over).
6. On the "How Much Excess to 2023?" screen enter how much you want to apply to 2023 ($400).

[psibley]

Thank you @DanaB27 - really appreciate the response!

[fanfare]

First off, your excess carries forward from 2022 into the next years until you resolve it.

"Therefore you have a total contribution of $2, 400 for 2023."

that's not correct

you don't have a 2,400 contribution for 2023

you must be allowed a 2023 contribution of at least $400 that you can apply to resolving the 2022 excess and then contribute for 2023 no more than the remainder of the allowed amount 

when you resolve the excess, the penalty stops

@psibley 

[fanfare]

maybe you're not allowed to make a $400 Roth contribution for 2023,

after Oct 18,2023, your 2022 tax filing due date including extensions, you can resolve the 2022 excess by taking out $400 from your Roth.

Any gains you made can stay in the Roth IRA.

@psibley 

[Mike9241]

in 2023 you'll need at least $400 in earned income to avoid another penalty.  you are subject to the penalty every year where there is or remains an excess contribution.